We’ve highlighted numerous times in past missives the difference between perception and reality. Market participants frequently perceive both as the same when they’re frequently not.
The perception was that a new president would unilaterally incite instant change: Regulations would be swept away, income-tax rates would be slashed, health care would be reformed, infrastructure spending would ratchet higher. All this would happen, if not in a New York minute, at least as soon as the new president formed his cabinet. The reality is that change — political change in particular — comes as a glacier comes, and not as a raging river.
This reality has sunk in with many market participants. The sweeping changes that Mr. Trump proposed on the campaign trail have become less sweeping now that he’s President Trump. No one should be surprised. Political opponents obviously offer resistance. Less obvious, though always inevitable, so do many political allies. People eagerly profess they want change; they’re far less inclined to initiate it.
Reality is less inspiring than perception. This is reflected in recent financial-market activity. Investors have taken more money out of riskier assets and placed more money in less-risky assets: stocks have sold off and bond prices have risen, which has caused bond yields to fall.
The yield on the 10-year U.S. Treasury note has settled at around 2.4%. The 10-year note influences mortgage-backed securities, which, in turn, influence mortgage rates. In less than a week, mortgage rates have dropped from a three-year high to the lowest level of March. The national average shows the rate on a prime 30-year fixed-rate loan averaging 4.25%, with 4.125% being offered at times.
After some outlier quotes on the high side earlier in the month, we are back again to the 4%-to-4.25% range on the prime conventional 30-year loan that was established at the beginning of the year. Now that reality has settled in, we wouldn’t be surprised to see quotes hold this range into April and beyond. Most of what’s realistically positive is priced into both equity and credit markets.
Therefore, we see few positives on the margin. This suggests that stock market gains will be harder to come by. At the same time, credit-market volatility should be reduced, which gives us more reason to believe that the 4%-to-4.25% range should hold for some time.
At this point, the odds that financial markets could turn negative outweigh the odds that they could turn more positive. This points to more weakness in equity prices; it could also lead to more strength in bond prices. Though the odds of it not happening are greater than those of it happening, a sub-4% quote on a prime 30-year fixed-rate mortgage isn’t beyond the realm of possibilities.
Date and Time
S&P/Case-Shiller Home Price Index
Tues., March 28,
9:00 am, ET
5.5% (Annualized Increase)
Moderately Important. Low inventory ensures that home prices remain on an upward trajectory.
Wed., March 29,
7:00 am, ET
Important. Though uneven week to week, purchase activity continues to trend positively year over year.
Pending Home Sales Index
Wed., March 29,
10:00 am, ET
Important. The index points to a pickup in home sales for March.
Gross Domestic Product
(4th Quarter 2016)
Thurs., March 30,
8:30 am, ET
2.2% (Annualized Growth)
Important. This first GDP revision should show improved growth for the fourth quarter, which should set the stage for a strong start to 2017.
If you own a home and home prices are rising, you’re generally happy. If you seek a home and home prices are rising, you’re generally unhappy.
Prices continue to rise, which is no surprise when you consider inventory levels. Trulia tells us that home buyers face the tightest supply levels on record. What’s more, inventory at the starter and trade-up segments continue to fall more than most segments. The former has dropped 8.7% so far this year compared with the same time last, while the former has dropped 7.9%.
Falling inventory impacts home sales. The NAR tells us that existing-home sales dropped 3.7% in February. The good news is that the NAR data show that the total inventory of existing homes was up for the month. But so, too, were existing-home prices. The median existing-home price for February was $228,400, up 7.7%. The latest price gains marked the 60th consecutive month of year-over-year price gains.
The good news is that the NAR data show supply levels improving. Supply in February increased 4.2% in February compared with January. At the same time, unsold inventory increased to 3.8 months compared with 3.5 months.
We’ve been down this road before: We’ve seen a few months of up trending inventory only to see the trend reverse course. But given the up-trends in housing starts, economic growth, and job creation, perhaps this time will be different.
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